The Bank of England held at 3.75% yesterday, and the Bank of Japan hiked 25bps overnight to 1.25%, a fresh 31-year high. Both the pound and the yen fell, with the vote splits driving the moves.
The BoE vote was 6-3, a sixth consecutive hold. Greene, Mann and Pill backed a rise to 4%, a repeat of July.
Bailey said energy costs have so far had a limited effect on prices and wages, but the longer crude prices remain elevated, the bigger the impact on inflation and "the more likely it is we will need to raise Bank Rate". The Bank pointed to slack in the economy and the tightening already delivered by rising gilt yields as its reason for waiting. Markets priced a hold but positioned for another member joining the hawks in a 5-4 split, so the pound sold off.
CPI hit 3.1% in August, and the Bank itself projects around 4% by early next year, double its target. With the Fed, ECB and BoJ all hiking around it, pressure is beginning to mount on the Bank to act. Our base case is now a November hike, subject to the war continuing.
The BoJ's move came three months after its last, having previously moved every six. The vote was 7-2, with both dissenters, Asada and Sato, appointed by Prime Minister Takaichi, who has long been wary of higher rates. The pair's dissent could be seen as the government signalling its disapproval of a quickening hiking cycle. With September carrying no quarterly Outlook Report and no new forecasts to lean on, markets read it as a signal the pace slows from here. The yen fell around 1% towards 157 against the dollar as a result. We expect the yen to continue weakening.
Reach out to the dealing desk if you need any help navigating what comes next.